September 19, 2011 8:32 pm
The single currency’s true fatal flaw
By Gideon Rachman
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If you want to understand why the euro is in such trouble forget, for a moment, debt and sovereign bonds – and take a look at the bank notes. The images on euro notes are of imaginary buildings. While national currencies typically feature real people and places – George Washington on the dollar bill, the Bolshoi theatre on the Russian rouble – European identity is too fragile for that. Selecting a place or a hero associated with one country would have been too controversial. So the European authorities chose vague images that represented everywhere and nowhere.
Now, a decade after euro notes first emerged from cash machines across the continent, this lack of a common identity is the fatal flaw that may sink the common currency.
Over the weekend Tim Geithner, the US Treasury secretary, displayed palpable impatience with what the Americans see as a lack of political leadership in Europe. But the problem that is bedevilling the currency is not ultimately to do with leadership. It is more fundamental than that. The fact that national loyalties are much stronger than any common European loyalty means leaders are constrained in the solutions they can feasibly consider.
In most European Union countries, including Germany, the euro was introduced without securing the direct assent of voters. It was assumed that voters would learn to love their new currency, when they saw that it led to a more prosperous and powerful Europe. But now that the single currency is instead associated with pain, austerity and debt, the limits to European solidarity are clear.
So when Angela Merkel, the German chancellor, rules out “eurobonds” (debt issues backed by all nations using the euro), she is not being unimaginative or miserly. She simply knows German voters will never accept underwriting the debts of southern Europe on a permanent basis. The voters of Finland and the Netherlands – the other northern European creditor nations – are more hardline than the Germans in their rejection of this notion. Meanwhile, anger against the flinty and self-righteous northern Europeans is mounting in austerity-hit nations such as Greece, Portugal, Spain and Italy.
Eurosceptics, who opposed the formation of the single currency, predicted this kind of debacle. Their arguments are still worth listening to – not just as an explanation of the origins of the crisis, but as a guide to what is likely to happen next.
Hostility to the launch of a single currency came in many forms, some of them quite nationalistic. Indeed the only thing that made me occasionally waver in my own opposition to the formation of the euro, years ago, was meeting some of the people who agreed with me.
Nonetheless, it seemed to me, then and now, that the eurosceptics had the best arguments. They were right to note that there are no examples of lasting currency unions that are not ultimately backed by a political union. Some europhiles, particularly in Britain, denied that a political union was necessary to support a single currency. Other europhiles, particularly in Brussels, argued that economic union would, in due course, lead to political union. The sceptics argued that, on the contrary, in an economic crisis, European political identity would be too weak to support the common currency. Events seem to be vindicating them.
The pro-euro crowd will respond that the game is not over yet. Faced with grim choices, European voters will realise deeper unity is the only way to go. I doubt that. On the contrary, it seems to me that leaders like José Manuel Barroso, the head of the European Commission, are wasting valuable time by demanding solutions such as eurobonds that are never going to happen. Just think about the steps that would be necessary. First negotiate a new European treaty, then achieve ratification in 27 countries – all in the midst of a fast-moving crisis. Forget it.
There is another possibility that might work, however. I have always believed that steps towards deeper European unity work best when they are technical-sounding, hard to understand and not subject to the approval of voters. The European Central Bank’s current programme to buy Greek, Italian and Spanish bonds – as endorsed by my colleague Martin Wolf last week – meets this description perfectly. But there is a problem. Germany is that rare country where central banking actually arouses deep political passions. A senior member of the Merkel government told me recently that the ECB’s bond-buying programme is already controversial in Germany – and he did not believe that it was sustainable for very long.
If much deeper European unity – through eurobonds, or the centralisation of taxation and spending – is off the table, we are left with two options. Either the current programme of austerity, mixed with emergency loans, will eventually “work”. Or some European countries will default and probably leave the single currency.
As Nouriel Roubini argues on this page, a departure from the euro may ultimately be in Greece’s long-term interests. But the short-term economic and political consequences could be very grim – and not just in Greece.
Europe could well see bank failures, much deeper austerity, higher unemployment, social unrest, political radicalisation, heightened tension between nations and a threat to the EU itself. Under those circumstances, being “right” will be little compensation – even to eurosceptics.
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Copyright The Financial Times Limited 2011.
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